This article first appeared in The Edge Financial Daily, on November 25, 2015.
KUALA LUMPUR: Shares in UEM Edgenta Bhd rose as much as 7.6% yesterday, as investors reacted positively to news that it will buy 80% of shares in KFM Holdings Sdn Bhd for RM128 milllion via cash and a share sale.
Trading of UEM Edgenta (valuation: 1.7; fundamental: 2.5) shares was halted for an hour yesterday because of the announcement, then resumed and hit an intraday high of RM3.40. At the close, the stock rose 7.28% or 23 sen to RM3.39, bringing a market capitalisation of RM2.74 billion.
The proposed acquisition is expected to give UEM Edgenta an immediate opportunity to expand into non-hospital related businesses and gain a foothold in Abu Dhabi and Dubai, where KFM is currently present.
In a filing with Bursa Malaysia yesterday, UEM Edgenta said it on Monday entered into a binding term sheet with Nurolamin Abas and Fardan Abdul Majeed (the vendors) for the proposed acquisition. Nurolamin currently holds a 51% stake in KFM and Fardan the remaining 49% stake.
Under the deal, UEM Edgenta will pay up front RM36 million in cash and issue 18.12 million new shares in UEM Edgenta at an issue price of RM3.09 per share.
The deal also involves a deferred cash payment of RM20 million over a period of three financial years, subject to KFM achieving financial targets for financial year 2016 (FY16), FY17 and FY18, as well as incremental value payment of RM16 million spread from FY16 to FY18.
“The upfront exposure to UEM Edgenta upon completion of the sale and purchase agreement (SPA) will only be RM92 million, translating into an implied FY14 price-to-earnings (P/E) of 8.16 times,” said UEM Edgenta, adding that the cash portion of the proposed acquisition will be funded through internal funds and/or bank borrowings.
KFM holds a 20-year concession to provide initial rectification works, retrofitting works, asset maintenance services and asset management programmes for the Prime Minister’s Office in Putrajaya.
KFM and its subsidiaries are also involved in the provision of integrated facility management services, green technology and sustainability services in Malaysia and the United Arab Emirates.
“The proposed acquisition is in line with UEM Edgenta’s overall strategy to expand into the asset-facility management business, and the environmental and sustainability business.
“The proposed acquisition will also provide the company [with] the opportunity to consolidate a key market player, acquire complementary skill sets and increase its market share in the facility-management sector in Malaysia,” said UEM Edgenta.
Barring any unforeseen circumstances, UEM Edgenta said the SPA is expected to be signed within three months.
In a note to clients yesterday, HLIB Research estimated that the acquisition price of RM128 milllion values KFM at 11.3 times trailing FY14 P/E and 10.2 times forward P/E.
“Our back-of-the-envelope calculation suggests that the acquisition would enhance [UEM Edgenta’s] FY16 earnings by 2.8% (assuming a half-year impact) and FY17 by 5.1%. This is sufficient to offset the dilutive impact from [the] issuance of new shares,” it said.
HLIB Research is maintaining its “buy” call on UEM Edgenta, with an unchanged target price of RM4.14 per share.
The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.